Equity valuation effects of forming master limited partnerships

Abstract

Equity valuation effects of decisions by corporations to shift assets to master limited partnerships (MLPs) are examined for the period 1982–1987. Positive average abnormal returns are found for (1) total conversions of corporations to MLPs (5.89%), (2) rollouts of subsets of assets by distribution of MLP equity claims to parent-firm shareholders (6.41%), and (3) rollouts of subsets of assets by public sale of MLP equity claims (2.41%). The positive effects are consistent with tax advantages, reduction in free cash flow, and information signaling. The positive effects for rollouts of subsets of assets are also consistent with reductions in information asymmetry and improvements in asset management.